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Working Paper No. 1418

Markups as a Hedge for Input Price Uncertainty: Evidence from Sweden

Working Paper
Agrawal, Sneha, Abhishek Gaurav and Melinda Suveg (2021). “Markups as a Hedge for Input Price Uncertainty: Evidence from Sweden”. IFN Working Paper No. 1418. Stockholm: Research Institute of Industrial Economics (IFN).

Sneha Agrawal, Abhishek Gaurav, Melinda Suveg

In this paper, we study a new channel to explain firms’ price-setting behavior. We propose that uncertainty about factor prices has a positive effect on markups. We show theoretically that firms with higher shares of inputs with volatile prices set higher markups. We use the Bartik shift-share approach to empirically test whether firms that use more oil relative to other inputs set higher markups when oil prices are more volatile. Our estimates imply that a one standard deviation increase in oil price volatility leads to a 0.38 percent increase in the markup of firms with average oil exposure.